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16.02.2024, 03:36

USD/INR extends its down leg ahead of US PPI data

  • Indian Rupee trades strongly on the decline of the USD on Friday. 
  • RBI's Das said persistent food price shocks and heightened geopolitical tensions are hindering policymakers' efforts to curb inflation. 
  • Investors will monitor the US January Producer Price Index (PPI) on Friday.

The Indian rupee (INR) strengthened on Friday as the US dollar (USD) softened. The downtick of the pair is backed by weaker-than-expected US Retail Sales, which trigger speculation that the Federal Reserve (Fed) will soon start cutting interest rates in the coming months. 

The Reserve Bank of India (RBI) Governor Shaktikanta Das said on Thursday that India has successfully navigated multiple challenges and emerged as the fastest-growing major economy. The economy is forecast to grow by at least 7% for the fourth consecutive year. However, persistent shocks to food prices and renewed geopolitical flashpoints are some factors that are now complicating policymakers' efforts to combat inflation. 

Investors await the US January Producer Price Index (PPI) on Friday. The downbeat report could exert some selling pressure on the Greenback and act as a headwind for the USD/INR pair. Furthermore, Fed officials Barr and Daly will speak later in the day. Next week, investors will take more cues from the Indian S&P Global Services PMI and RBI MPC Meeting Minutes. 

Daily Digest Market Movers: Indian Rupee remains strong amid multiple headwinds

  • India’s goods trade deficit narrowed by nearly 12% in January compared to the previous month. The merchandise trade deficit fell to $17.49 billion in January from $19.80 billion in December. 
  • Imports declined to $54.41 billion from $58.25 billion in December. Exports fell marginally to $36.92 billion in January from $38.45 billion in December. The decline in exports is mostly attributable to the armed war in the Red Sea.
  • Foreign portfolio inflows into India are expected to increase to roughly 1% of GDP from 0.4% in the 2014–2022 timeframe, according to the CLSA. 
  • US Retail Sales dropped 0.8% MoM in January from a 0.4% rise in December, worse than the market expectation of a 0.1% decline. Retail Sales Control Group came in at -0.4% MoM versus 0.6% prior.  
  • The New York Empire State Manufacturing Index arrived at -2.4 in February, a big improvement from the previous reading of -43.7. 
  • Federal Reserve Bank of Atlanta President Bostic said the Fed does not face urgency to cut rates given the current economy, and a strong economy argues for patience in adjusting monetary policy.

Technical Analysis: Indian Rupee resumes upside journey within the long-term trading range

Indian Rupee trades on a stronger note on the day. USD/INR remains stuck within a familiar multi-month-old descending trend channel of 82.70–83.20 since December 8, 2023. 

In the near term, USD/INR resumes a bearish outlook as the pair is below the key 100-period Exponential Moving Average (EMA) on the daily timeframe. The 14-day Relative Strength Index which lies below the 50.0 midline also supports the downward momentum for USD/INR. 

On the bright side, the critical resistance level for the pair is seen near the upper boundary of the descending trend channel at 83.20. A bullish breakout above this level could get enough fuel to hit a high of January 2 at 83.35, en route to the 84.00 psychological level. 

In the case of the bearish environment, the first downside target is located near a low of February 2 at 82.83. Further south, the lower limit of the descending trend channel 82.70 acts as a potential support level for the pair, followed by a low of August 23 at 82.45. 

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Euro.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   0.11% 0.13% 0.14% 0.21% 0.23% 0.30% 0.14%
EUR -0.12%   0.01% 0.02% 0.10% 0.12% 0.20% 0.03%
GBP -0.14% -0.03%   -0.01% 0.07% 0.09% 0.17% 0.00%
CAD -0.15% -0.03% 0.00%   0.05% 0.08% 0.16% -0.01%
AUD -0.18% -0.05% -0.03% -0.03%   0.06% 0.14% -0.03%
JPY -0.23% -0.09% -0.08% -0.07% -0.07%   0.09% -0.06%
NZD -0.31% -0.19% -0.17% -0.16% -0.10% -0.08%   -0.17%
CHF -0.15% -0.04% 0.01% 0.01% 0.05% 0.07% 0.17%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.

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